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What Is a Business Evaluation?

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  • Written By: K.C. Bruning
  • Edited By: John Allen
  • Last Modified Date: 14 September 2016
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The process of business evaluation, also known as business valuation, is used to determine how much a company is worth. It is an assessment of every aspect of the business. This includes everything from physical assets to brand power and perceived public perception of the company. A business evaluation is typically used by a potential buyer to determine a worthy price to pay to purchase the company or by the seller to find a fair sales price. An evaluation may also be used to determine the value of a business for issues such as legal disputes and division of assets among new owners.

A typical business evaluation will be conducted with the future of the company in mind. Its value will depend on whether it is going to stay intact and continue business as usual or if its assets are somehow going to be separated. If a business is not going to stay intact, then the accuracy of the evaluation depends upon how much the individual performing the assessment knows about intended plans for the company. For example, a brand name or logo may have exponentially more value than the physical assets of a company if the two are separated. If the client base is to be separated, an evaluator would need to know how in order to properly assess the value of each account and the way they are split.

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There are a variety of approaches that can be used to conduct a business evaluation. A valuator can focus on the way the company is perceived in the market and how that contributes to its value. Another approach is to evaluate the potential future earning power of the company. A more straightforward approach is to make an evaluation based on the company’s assets. In this case, it is particularly important to know whether the company will stay in business or be liquidated, as this can dramatically change the value of its assets.

While a business evaluation can be performed internally, hiring a professional valuator is often a wise choice. This is primarily because so many of the factors involved in assessing value require a strong understanding of the market. This includes knowledge of current conditions and trends and utilizing various methods for assessing future value. An impartial outsider can also often provide a more accurate evaluation than an individual with a stake in the company.

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